The plan to overhaul and streamline my finances is well underway. Now that my student loans have been paid I will focus on paying the mortgage on my rental property. Only one of the rental properties has a mortgage, and the interest rate is 5.125%.
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| $103,000 in 2009? Sold! |
Deal of the Decade
Be fearful when others are greedy and greedy when others are fearful. Warren Buffett
This is an exciting rental property for me for several reasons, and it is a reminder about how important it is to have some dry powder tucked away to take advantage of a deal.
- It was 2009. The real estate market was in crisis. D.R. Horton decided to stop development in this neighborhood due to slow sales. The surrounding area was growing pretty fast, the fundamentals were good, but the builder wanted out. This house was among the last spec homes built in the neighborhood, and contracts had fallen through with three previous buyers because financing was so hard to obtain during the housing crisis. The price for this house was cut drastically. Basically a fire sale. I was able to buy it and add some nice interior upgrades for $103,000. This is a 3 bedroom, 2 bath house. To put it into perspective, I bought this exact model in a different neighborhood with fewer upgrades a year earlier for $28,000 more.
- Now that the market has recovered, so has the area. Another builder stepped in to buy the empty lots and is completing the build-out of the neighborhood. A fancy grocery store and shopping center opened less than a mile away. An apartment complex at the entrance to the neighborhood was recently purchased, and upgrades by the new owner have allowed for 20% higher rents at that complex. Within a couple miles, dozens of retail stores and restaurants have opened.
- After I bought the house I listed it for rent with a management company. I immediately received an offer from a tenant but the tenant asked for a discount on the rent. I figured I would make up the amount I was discounting by getting a tenant in the house right away, so I pulled the trigger. Ten years later, the same tenant still lives in the house.
I am giddy every time I think about this - I've never had a tenant stick around for 10+ years. I've steadily increased the rent, and while I still charge less than what I could get, there's huge value in keeping the same tenant (no turn costs, no vacancy costs, just a reliable rent check that is deposited into my account on time every single month). The current rent is twice what my mortgage costs, so I'm comfortable with what I'm getting.
Time to Nix That Mortgage
With an interest rate of 5.125%, paying off the mortgage on this house is my next goal. Today, I made a $2,000 extra payment. I really like the feeling I get by reducing debt. But more importantly, based on the current state of the real estate and stock markets, I sincerely feel this is the best use of my funds. Real estate is expensive once again, and when there is a deal it is quickly bid up by professional investors with greater resources than me. And the stock market is also pricey, especially considering we are due for a recession. In addition to using cash flow to pay off this mortgage I am considering using some of the cash in my brokerage account.
Paying off this mortgage offers a guaranteed 5% annual return. That's a solid accomplishment. Nothing to brag about, but certainly better under current market conditions.
September is a perfect example of how an otherwise frugal month was destroyed by an unexpected emergency. Early last month I had a major toothache. Turned out I needed a root canal. After maxing out my dental insurance, I was on the hook for close to $2,000 in charges for the root canal and crown. Hefty, but the pain was so bad that I am happy it's gone!
